Decision Rule for Reducing Output When Price is Below Marginal Social Cost
In a market with negative externalities, output should be reduced if the market price (P) is less than the marginal social cost (MSC). This rule, expressed as , is based on the fact that MSC is the sum of the marginal private cost (MPC) and the marginal external cost (MEC). Therefore, the condition is equivalent to stating that output should be reduced whenever .
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Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
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Decision Rule for Reducing Output When Price is Below Marginal Social Cost
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